Banks’ role in payday loans gets scrutiny

Act as collectors of interest that could top 500%

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Subrina Baptiste of Brooklyn said JPMorgan Chase allowed payday lenders to withdraw funds from her New York bank account in January, draining her child-support money.

By Jessica Silver-Greenberg
New York Times
February 24, 2013

NEW YORK — Major banks have quickly become behind-the-scenes allies of a raft of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.

With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta, and the West Indies to more easily evade statewide caps on interest rates.

While the banks, which include companies such as JPMorgan Chase, Bank of America, and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned.

In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.

“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,’’ said Josh Zinner, codirector of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York.

The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts. ‘‘The industry is not in a position to monitor customer accounts to see where their payments are going,’’ said Virginia O’Neill, senior counsel with the American Bankers Association.

But state and federal officials are taking aim at the banks’ role at a time when authorities are increasing their efforts to clamp down on payday lending and its practice of providing quick money to borrowers who need cash.

The Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau are examining banks’ roles in the online loans, according to several people with direct knowledge of the matter.

Benjamin M. Lawsky, who heads New York state’s Department of Financial Services, is investigating how banks enable online lenders to make loans to residents of the state, where interest rates are capped at 25 percent. Many customers are already on shaky financial footing, and the withdrawals often set off a cascade of fees from problems like overdrafts.

Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions.

Some state and federal authorities say the banks’ role in enabling the lenders has frustrated government efforts to shield people from predatory loans — an issue that gained urgency after reckless mortgage lending helped precipitate the 2008 financial crisis.

Lawmakers, led by Senator Jeff Merkley, Democrat of Oregon, introduced a bill in July aimed at reining in the lenders, in part, by forcing them to abide by the laws of the state where the borrower lives rather than where the lender is.

The legislation, pending in Congress, would also allow borrowers to cancel automatic withdrawals more easily.

While the loans are simple to obtain — some online lenders promise approval in minutes with no credit check — they are tough to get rid of.

Customers who want to repay their loan in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans withdraws only the interest owed.

For Subrina Baptiste, 33, an educational assistant in Brooklyn, the overdraft fees levied by Chase drained her child support income. She applied for two payday loans in 2011.

Baptiste said she asked Chase to revoke the automatic withdrawals in October 2011 but was told that she had to ask the lenders instead. The bank charged her $812 in fees and deducted more than $600 from her child-support payments to cover them.

A spokeswoman for Bank of America said the bank always honors requests to stop automatic withdrawals. Wells Fargo declined to comment. Kristin Lemkau, a spokeswoman for Chase, said: ‘‘We are working with the customers to resolve these cases.’’ Online lenders say they work to abide by state laws.

Payday lenders have been dogged by controversy almost from their inception two decades ago from storefront check-cashing stores. In 2007, federal lawmakers restricted the lenders from focusing on military members. Across the country, states have steadily imposed caps on interest rates and fees that effectively ban the high-rate loans.

While there are no exact measures of how many lenders have migrated online, roughly 3 million Americans obtained an Internet payday loan in 2010, according to a July report by the Pew Charitable Trusts.

By 2016, Internet loans will make up roughly 60 percent of the total payday loans, up from about 35 percent in 2011, according to John Hecht, an analyst with the investment bank Stephens Inc. As of 2011, he said, the volume of online payday loans was $13 billion, up more than 120 percent from $5.8 billion in 2006.

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